How long does my super need to last in retirement?

Most people think about retirement planning in terms of savings and income – but there’s one crucial question that doesn’t get enough attention: ‘How long will your retirement actually last?’

In this video we’re speaking with Jim Hennington, one of Australia’s leading thinkers on retirement income strategy and longevity planning. Jim has spent years developing tools and frameworks that help people make better retirement decisions – especially around how long their money needs to last and how much they can safely spend.

In the conversation we unpack some of the biggest misconceptions around life expectancy and explore smarter ways to plan for longevity.

Transcript

Robert Barnes: Today, I’m speaking with Jim Hennington, one of Australia’s as leading thinkers on retirement income strategy and longevity planning. Jim has spent years developing tools and frameworks that help people make better retirement decisions, especially how long their money needs to last and how much they can safely spend. In this conversation, we’re going to unpack some of the biggest misconceptions around life expectancy, explore smarter ways to plan for longevity, and look at how retirees can approach spending, investing, and structuring their income more confidence. So welcome, Jim.

Jim Hennington: Thanks, Rob. Thanks for having me along.

Robert Barnes: You’re very welcome. So when people talk about life expectancy, what do they generally mean, and why might that be misleading?

Jim Hennington: That’s a great question. So I think a big part of the issue here is that the word life expectancy implies it’s an expectation in terms of how long am I expected to live? So I think people interpret it as a prediction. But mathematically, Basically, what’s going on, it’s more if you go back to your high school stats or university stats, you have a concept called an expected value. And an expected value is actually just the average. You’ve got this mismatch between the layman’s language, life expectancy, when am I expected to die, versus how it’s calculated, which is just an average, an average of a broad rage. Just taking life expectancy and applying that as a planning horizon in retirement is got quite a few hazards, which we’ll talk through. But the main one is half of people are expected to live even longer than that.

Robert Barnes: I guess another parallel to think about would be what is the average wage in Australia or how much is the average house worth? It’s useful in some in regards, but it’s meaningless for an individual.

Jim Hennington: Absolutely. Yeah, that’s spot on. I can talk a bit more about why it’s hazardous to use life expectancy as a retirement planning time frame. In terms of understanding this, so this chart on the horizontal axis, it is your age. What the blue lines are showing is all Australians who passed away in 2023. So this comes from the Australian Bureau of Statistics. So it’s everyone who died aged 65 or more. And so it’s showing you how long they all lived. So the blue lines is showing you how many people passed away in 2023 at that age. And so you can see that people aged 65, there’s about 2,000 Australians passed away at that age. But there’s a huge range. So you’re right up to age 100. So there’s about a thousand who were 100 when they died. But you can see that curve. Now, the red line in the middle is the average of them all. So the red line is similar concept to life expectancy. So what is the average? But the blue is showing you reality. And it makes it quite clear that to use a planning horizon of the red line for all of these people, it doesn’t really make sense.

Huge number of people are going to live beyond that, and some will live less than that.

Robert Barnes: So you can see that the most amount of people are actually between the 84 and 91 range. So is it actually 50% are more than 83 and 50% are younger?

Jim Hennington: That’s right. Yes. So the red line in this chart is literally the average of all those people who passed away in 2023. And yes, so half of them lived longer and half of them lived shorter. So if you’re planning retirement and you use, say, one of the online calculators and you set a time frame for all your projections of how long you want your money to last, if you set that to age 83, it might mean you’re spending down your super at a rate that causes your assets to run down to or thereabouts in your mid-80s or early-80s. The problem with that is there’s half of the people who did such a process would actually run out of money and live longer. If you set a time frame in retirement that’s too short, you’re potentially going to be spending too much per year, and it leaves you with a risk that you’ll still be alive and have run low or run out of money.

Robert Barnes: So is there a better way to plan for longevity when you think about retirement income?

Jim Hennington: So firstly, I might just dig into a little bit around what’s driving the the blue lines in this chart. So you’ve got a number of reasons why different people live to different lifespans. So health is the biggest issue. So some of the people who passed away early, they may have had health conditions when they retired. So you might have had people who already had heart issues or cancer issues or your circulation system issues. But then you’ve got other drivers. There’s lots of factors here. Your diet is part of it, how active you are. People who are fit and active tend to live longer than people who are sedentary. And wealth is interestingly another indicator. So people who have more money tend to live in better homes, tend to live nearer to good your medical care, and tend to be able to afford good lifestyles and health care, and therefore tend to be in the higher echelons of this chart. But there’s a few other factors that It’s going to cause people to need to plan for longer. We’ve also got to allow for improvement rates. So what this chart doesn’t allow for, this is just literally 2023.

And these people were born 70 years ago or 80 years They were born back in the first half of last century. If we take today’s retirees or people who are approaching retirement now, they’re going to be alive for another two, three, four decades from now, and we need to allow for future improvements in the medical system. So you’ve got lots and lots of research going into heart care, cancer treatments, the diagnosis and management of all the different The issues that people have in retirement. And what that does is each year it increases the averages of how long people live. So that red line being the average, over the decades, it’s going to move to the right by quite a bit. Then you’ve also got couples. So when you’re planning as a couple, you’ve got two chances of beating the average, if you like. So this chart is just showing individuals. But if you’ve got a husband or wife, say, and they want their money to last as long as either person can live, then they’ve got to be planning around the fact that they’ve got two chances of living up to the higher end of the chart.

Basically, there’s quite a few reasons why you should be focusing… From a planning point of view, you should be focusing on your late 90s or up to age 100 rather than just googling average life expectancy and getting a figure like 83. So in terms of what does this mean, there’s a trade off between making your money last longer versus being able to spend more. And it’s getting that right, which is the next level when it comes to these concepts.

Robert Barnes: So another way to look at it is confidence level. And you’ve got a chart here. Could you talk us through what we’re seeing here?

Jim Hennington: What this chart is showing is… The previous chart was actual lifespans of how long people are actually living. What this chart is doing is it’s taking that range that we know about, and it’s projecting it forward. Again, the horizontal axis is how long people might live. The vertical axis is looking at, if you had a big group of people, how many of them would live to each age? But what we’re doing here is we’re allowing for couples. This chart applies to couples who are both aged 67, and it’s looking at the longer living spouse of each couple. So even if one of the two passes away, they would only show in this chart when the second person passes away. So the actuaries would call it second death. And this chart does allow for all the medical assumptions about medical improvements. And so they call that longevity improvements. So it’s allowing for trends in life expectancies increasing as the medical world develops and keeps improving things. Now, in terms of confidence, what we’re doing here is we’re saying that if you wanted to be 50% confident that your planning horizon will cover how long you might live, then we’re talking about age 94.

If you set age 94 as your planning horizon, half of people like you would pass away earlier than 94, but half of people like you One spouse would live longer than 94. Then if we look at the 75% confidence, so what we mean by that is for people who want to be 75% sure that their planning horizon will cover how long they might live, then it’s saying that it needs to be to age 98. So if you set a planning horizon of age 98, then 75% of people like you, that’s enough. They’ll have passed away before that. But obviously, that leaves 25% of people like you who one spouse would live even longer than age 98. And likewise, with the 95% confidence level, it’s 103. So What that’s saying is in order to be 95% sure your planning horizon, how long you’ve planned your retirement money to last, if you want to be 95% sure, it will cover however long you live, which is an unknown. Then 103 will cover 95% of people like you. 5%, one spouse is expected to live even longer than that.

Robert Barnes: Wow. So if we go back to this one, the median was, or the average, sorry, was 83. But I guess 75, is that a standard confidence level that people are using in financial planning?

Jim Hennington: It is, yes. And so we’ve looked at what people do overseas as well. It is a It’s a bit finger in the air. They’ve just picked 75% of something.

Robert Barnes: Sounds about right.

Jim Hennington: Yeah, exactly. But so, for example, in Canada, the Financial Planning Standards Board, role rolls out publications to all financial advisors and suggests that they look at the 75% confidence level or I think the other one is the 90% confidence level. So, yeah, it’s a little bit arbitrary, but it just gets a bit of momentum Wow.

Robert Barnes: So that’s a 15 year difference from what people have been considering as the average life expectancy. That’s right. If you’re in a couple, you need to really be thinking about 98, not 83.

Jim Hennington: That’s right.

Robert Barnes: And does it do much for single people?

Jim Hennington: So on this slide, what we’re doing, we’ve flattened that curve and just make it a little bit simpler. So the top bar is, say, a male aged 65, and he’s got a 50% chance of living to age 89. He’s got a 25% chance of living to 94, and a 10% chance of to age 98. You might think, Oh, 10% chance, that’s pretty unlikely. But another way to think about it is if you had 100 people like you, 10 of them are expected to still be alive at age 98. It’s not a matter of, Oh, it probably won’t happen. It will happen to about 10% of people like you. The second one is a female. For females aged 65 and average health, there’s a 50% chance she’ll live at 91, a 25% chance of living to 96, and a 10% chance of living to 99. Then when you look at couples, couples have got two chances of living a long time. What we’re looking at here is the longer living spouse. Even if one passes away at life expectancy on an average, the Second person, half of couples will still have one spouse alive at 94, 25% of couples would still have a spouse, one person alive at 98.

And 10% of couples would still have one person alive at age 100. People are sometimes shocked and surprised, but the stats keep showing this. That big range that we showed on the previous chart, it’s very consistent from year to year, and there’s a trend. So this is showing how consistent these patterns are. Each line on this chart is for a different calendar year. And it’s showing of all the retirees who passed away in that year, how old were they? And you can see just how mathematically consistent it is. It’s the same shape year on year on year. And so when we’ve calculated all these probabilities, it’s based on pretty the consistent data that we’re getting about how long people live. But we also allow for the trends in… It’s all moving to the right gradually as a medical system keeps trying to solve all these problems.

Robert Barnes: Yeah, the shape of 2022 looks quite different. Are there any explanations for that?

Jim Hennington: Covid?

Robert Barnes: 2022, right. Okay.

Jim Hennington: Yeah. I think there’s lots of research on the impact of COVID. I suppose at high level, COVID had less impact than the media would have implied. It’s still the same shape, but there were consequences of the lockdown repressing some communicable diseases. Then there was a bit of a bounce back after that. There’s lots of research on that, but you can see that the overall pattern was a bit different, but not radically different Yeah.

Robert Barnes: The shape is definitely, you can see it’s very consistent after ’84, but you’ve got some spikes at different ages, coming through at different years. I guess that just happens.

Jim Hennington: Yeah, that’s to do with the number of people. Yeah, I think there’s just more people of that age. You can see that spike moving to the right.

Robert Barnes: Yeah, right.

Jim Hennington: It’s just a year when there was a lot of babies.

Robert Barnes: The boomer, the baby boom.

Jim Hennington: That’s right. If you go back and look, because I looked at that spike and I’m like, Oh, yeah, why is that consistently there? It moves from year to year to year. It’s literally just a year where there was a lot of people.

Robert Barnes: Okay, interesting. So we do use your lifespan calculator on SuperGuide. Can you explain a little bit about how that works? And what did that help you understand that basic tables don’t?

Jim Hennington: Yes. So we built this tool in To help people make it easy to take all these concepts and apply it to themselves in a nice easy way. So this is an online lifespan calculator. So it’s not a life expectancy calculator. It’s dealing with the concept of lifespan. And you go on. It’s pretty quick and easy to use. You enter your age, gender, your spouse’s age and gender. Then you give it an option of how confident you want to be that your retirement plan can last as long as you live. And it echoes what we were saying earlier. So if you say 50% confident, it means that there’s a 50% chance that the planning horizon will cover as long as you live. If you pick 75%, you’re being cautious. It’s the planning horizon that the calculator gives you as a 75% of chance of covering your actual lifespan, and ditto with the 90% confidence. People are just encouraged to choose one, and then it produces all the results that are personalised to them. They can either just have it based on the Australian population averages Or you can personalise it. And it asks you a few questions about your lifestyle, your diet, any health conditions you’ve got, your wealth.

And it just defines your answers to you. But yeah, so If you click 90% confident, then it’s giving you a pretty cautious long planning horizon because there’s a 90% chance you’ll pass away before that answer. So it helps people. And once you get to the results page, you can go back and change how confident you want to be. You can see the difference. But it’s designed to make it really easy and user friendly. We’ve had well over 25,000 people use this calculator. It’s pretty popular.

Robert Barnes: Fantastic. So what’s the trade off between choosing a longer planning horizon and how much you can spend each year?

Jim Hennington: Yeah, that’s a really good question. So obviously, if you choose a longer time frame, then what that means for your managing your money is you’re trying to get your retirement assets to last for more years. So to get your retirement assets to last for longer, you’ve got to draw down less per annum because if If you spend too much, you’ll run out. But if you spend less, it’ll mean your assets last for longer. If we take the red line, if we start with that one, what this example is, is a female aged 60 five with $400,000 of super, so just a single person. For this exercise, we’ve just assumed a 6% return net-of-all fees in retirement and an income level that’s assumed to increase broadly by inflation, so 2. 5% per year. So for her to be 50% confident that her planning horizon will cover her lifespan, she needs to make it last for 26 years. If If we then say, okay, based on those assumptions, how much can she spend per annum to make her $400,000 last for 26 years? The answer is, what is that about? It would be down to 23,000 per year.

But if she wants to be 75% confident, so that’s the Amber, the second bar from the top, to be 75% confident that her planning horizon will cover however long she lives, She needs it to be able to last 31 years. To get her $400,000 to last for 31 years, then based on these assumptions, she can only draw somewhere between 20 and 21,000 per year. She’s basically got to draw less or spend less of her money per year in order to get it to last for 31 years. The other one is the top bar. Here she’s 90% confident that the planning horizon will cover how long she might live. It’s going to last for 34 years then, in which case she’s going to be pretty frugal. It’s something like $19,400 per year. As the spending to make sure her $400,000 can potentially last for 34 years. You’ve got this trade-off of being more confident but having to spend less to have that confidence. So down the bottom, this is just comparing it with a fully guaranteed annuity. Treasury and government are encouraging the industry to look at annuities more because the data shows that a lot of people do want to be confident that they’re not going to run out of money in retirement.

And one option is to just spend less and sit on your money just in covis. But from an economic point of view, from an Australian aggregate point of view, it’s a pretty inefficient way of managing this risk. Pulled products are another way of doing it, so annuities and lifetime income products. There’s a growing range of those coming to market, but this dark green is the gold-plated version. It’s a fully inflation-linked annuity. It lasts for life no matter how long you live. For $400,000, it pays just under $20,000 per year, which is more than the top green light. So it gives you more confidence and more income for people who are very cautious. There’s a range of different products out there for people who want to be a bit more happy to accept a bit more risk.

Robert Barnes: So these have obviously been available for a while, but we’re seeing super funds themselves adopt it as part of the options when people get retirement.

Jim Hennington: Yeah, that’s right. In total, I calculated there’s over 5 million Australians who have got money with financial institutions who do offer a lifetime option.

Robert Barnes: So 5 million Australians do have access to these through their super fund at the moment. We just need some of the bigger ones. So Australian Super, that would add another 3 million as soon as they do. But they’re supposed to be doing that this year, I believe.

Jim Hennington: Yeah, that’s right. I think most of them are looking at it because we had the Retirement Income Covenant come out, and that was designed to be gradually introduced and implemented. We know the funds, quite a few of them are actively looking at this. Australian Super is a good example, but there’s quite a few more that are joining the ones who’ve already done it.

Robert Barnes: Now we’re actually going to get a little bit more technical. If people have stuck around this far, then we can introduce another level of technicality. But there’s periods and cohort life expectancy as well. So what are the differences between those?

Jim Hennington: Okay. So, yeah, as you say, we’re getting technical here. So here’s where life expectancy, it’s based on averages, and what we’re looking at is how they’re calculated. So period life expectancy is where we take a particular point in time and we look at the experience of people who were alive and passed away in that particular year or range of years. And so we’re looking at a particular period. We look at all the data of how long people lived. We calculate the average. But what it’s effectively doing, it’s assuming that everyone spends their whole life in that calendar year. It’s not particularly helpful concept, even though it’s the main one referenced. So So it’s easier to calculate, it’s easier to talk about. But what it’s really doing, it’s assuming people spend their whole life in that period, from age zero all the way to age 100, as if they lived their whole life in that year. So on this chart, it’s showing the period life expectancies based on different time frames. So the first column is for 1965 to 1967. So That one is calculated using all the data that was available back then and assuming people spent their whole life in that year.

The average life expectancy for a 65-year-old male back then was, what was that, 77. Then the next column is for people 1970 to ’72, so it’s pretty similar. But you can see how the blue lines are getting higher higher and higher and higher. What that is showing is that over time, the life expectancies from the data that we’re seeing goes up. Now, cohort life expectancy is a different concept. That’s where we acknowledge that, well, hang on, people don’t spend their entire life in 2020. They might be aged 65 in 2020, but then they’re 75 in 2030. And then in 2040, they’re 85. And so we’re allowing for the fact that an individual’s lifespan goes across multiple periods. And this is where we allow for longevity improvements, and we can actually take into account that mortality rates are reducing, so people are living longer, and bake that into the calculation. So that orange line The curve across the top is showing the cohort life expectancy. So it’s basically not… It’s allowing for the fact that you don’t spend your whole life in one period. You’re allowing for a cohort being alive for many, many decades.

Robert Barnes: Why isn’t cohort adopted if it’s proving itself a bit more reliable?

Jim Hennington: It is sometimes adopted. I guess one of the main reasons, you can’t just do it in a lookup table. The calculation is a bit more complex than that, and it needs a calculator as opposed to a lookup table. And just for that simple fact, people tend to just go for the easy option and quote period life expectancy.

Robert Barnes: But can financial advisors, for instance, do they have access to these cohort calculators to be able to calculate that for an individual?

Jim Hennington: If they look for it, they definitely have. So for example, that lifespan calculator on the SuperGuide website, some financial advisors we know will use that with each client, and it will deal with the cohort, everything we’ve talked about, it’ll deal with.

Robert Barnes: Fantastic. So how much longer might someone live according to life expectancy? Could you give us any examples? I mean, I guess we can see here Is it about two or three years?

Jim Hennington: Yes, that’s right. To allow the difference between period life expectancy and cohort life expectancy tends to be a couple of years. I did a bit of an example for you.

• If you just went on to Google and didn’t even think about the question, just typed life expectancy in Australia, it’ll come up with a figure like age 83.
• But then you’ve got to allow… That’s for a baby. You’ve then got to allow for the fact that you’re already aged 65. If you’re already 65, then by definition, you’re already in the longer living cohort for people who are born in the year you were. A lot of people have already died by now. The fact that you’re already 65 means you’re already in the longer living group. You got to add about four years for that.
• Then you’ve got to allow for cohort life expectancy as opposed to period life expectancy. Basically, allow for future improvement rates. You’d add another two years for that.
• Then you’ve got to allow for confidence. You don’t want to just base it on averages. You want to be confident. Depending on how confident you want to be, let’s say 5-9 years, you’ve got to add to that result if you want to be 75% or 90% confident.
• You’ve then got to allow for couples. So allowing for the fact that you’ve got, if you want your money to last as long as the person can live, then you’ve got to add another three to five years.

So you’ve gone from 83 plus four plus two plus five or nine plus another three to five. And you can see how you actually get to closer to a hundred than 83.

Robert Barnes: Wow. That’s quite a difference. Yeah. So don’t just rely on Google, even if it’s Google AI. Well, that’s lots of food for thought, lots to think about there, Jim. So thank you so much for giving us your time and expertise today and taking us through this.

Jim Hennington: My pleasure. Yeah. Thanks, Rob. Hope people found it interesting or useful.